Assume that market demand for tomatoes is given by P = 8 - Q and market supply for tomatoes is given by P = 2 + Q where P is dollars per bushel and Q is millions of bushels per year. Graph these and find the equilibrium price and quantity in this perfectly competitive market. Using the rule that the area of a triangle equals one half times the base times the height, calculate the consumer surplus and the producer surplus and the total (social) surplus. Does this outcome attain allocative efficiency?
Now assume that the government imposes a price ceiling of $4 per bushel on tomatoes. What do we call this situation? Which curve (supply or demand) sets the actual number of tomatoes traded in the market if the price ceiling is in place? What is the market quantity traded? What happens to the areas of the consumer surplus, producer surplus, and total surplus? Is allocative efficiency obtained? Explain